In today's global markets, logistic service providers (LSPs) offer a range of services from basic transportation of goods (i.e., first party logistics, “1PL“) to sophisticated logistics management, including ordering, production, warehousing, transportation management systems, and optimizing the supply and delivery chain (5PL). LSPs play a critical role in "facilitation" – a term that encompasses their involvement in managing goods, technologies, software, and services subject to export controls and sanctions. Beyond their responsibilities in complying with regulatory export controls and sanctions, LSPs are seen as key players in combating money laundering and avoiding involvement in predicate offenses or socially unacceptable practices including tax evasion. In this article, we explore how LSPs can maintain their crucial roles within the intricate framework of international trade regulations, ensuring they avoid penalties and safeguard their professional reputation. 

THIS ARTICLE IS WRITTEN BY HERMAN ANNINK ([email protected]) AND SEFA GECIKLI ([email protected]). HERMAN AND SEFA ARE BOTH PART OF RSM NETHERLANDS BUSINESS CONSULTING SERVICES WITH A SPECIFIC FOCUS ON SUSTAINABILITY AND INTERNATIONAL TRADE.  

Operating on behalf of their clients across various jurisdictions and often dealing with an array of goods and transactions involving several types of end-users, end-uses, and end-destinations, LSP entities are uniquely positioned and expected to detect and deter illegal activities that could be masked within legitimate business operations or act on indications thereof. Their span of control and ability to manage and oversee the supply and delivery chain, including the items and parties involved, place them at the forefront of efforts to uphold both regulatory compliance and ethical standards, managing risks in global commerce.

Export Control and Sanctions

From an U.S. perspective, understanding the concept of "facilitation" of a violation, is essential  to understanding the legal boundaries and compliance requirements these LSPs must navigate. Any support offered by LSPs in the execution of a transaction involving forbidden, restricted or sanctioned goods or persons/entities can be seen as a violation as well, potentially exposing LSPs to legal accountability, enforcement actions and financial penalties.

The U.S. definition of facilitation includes a variety of activities such as approving, assisting, or supporting any acts that transfer value related to sanctioned or controlled items. This could range from financial services like funding, insurance, and brokering transactions, to physical logistics such as transportation and warehousing of goods. The legal framework also extends to the provision of personnel, software, technology, or other resources that might indirectly support the movement of such goods. This broad definition emphasizes a proactive compliance approach and a broad scope, wherein LSPs must ensure that none of their services will lead to violations of and/or are used to circumvent sanctions or export control requirements.

From an EU perspective, we observe how the concept of “facilitation” is also applied here in real-world scenarios. For example, Dutch courts have held companies accountable for acknowledging when LSPs have knowledge or have indications that shipments contain military goods and ensuring appropriate export licenses are obtained. For example, a case involving KLM highlighted the necessity for carriers to verify the contents of their shipments and nature of the end-users to prevent the unauthorized transport of military goods, underscoring the need for due diligence and strict adherence to regulatory requirements. Another Dutch court case involving the violation of EU sanctions against Russia demonstrates the legal implications of transporting dual-use items that could potentially benefit military activities.

In numerous cases, Dutch courts have emphasized that LSPs including transporters ought to recognize when shipments involve goods subject to licensing requirements. These decisions highlight the expectation that as professional providers, they should be well-versed in applicable laws and regulations, and understand when an export license is necessary. Consequently, these providers can anticipate proper internal scrutiny to ensure compliance and prevent such violations.

Money Laundering

LSPs can either inadvertently or intentionally become entangled in money laundering activities through various operational mechanisms. Criminal companies may engage in misrepresenting the nature, quality, or quantity of goods to commit fraud or any other predicate offence and involve LSPs in the logistics handling of these goods worldwide. These examples underscore the critical importance of logistic companies thoroughly understanding and monitoring the goods they transport. 

From a Dutch perspective, the concept of "culpable money laundering" as defined under the Dutch Penal Code links directly to the operational risks that LSPs may face in their role within global trade. It highlights that an indication or even a mere suspicion of money laundering, prompted by inadequate explanations for the origin of funds or any peculiarities in transactions, can lead to allegations and legal scrutiny. For LSPs, this means that any failure to properly vet the goods and financial transactions they handle in high-risk cases could inadvertently involve them in money laundering activities. Furthermore, the Dutch government’s approach to undermining criminality reinforces the responsibility of economic actors including LSPs. This approach emphasizes combating the facilitation of predicate offenses within multinational companies. LSPs, by the nature of their operations which might span multiple jurisdictions and involve various corporate entities, can sometimes unknowingly facilitate such predicate offenses linked to larger criminal activities, including money laundering as outlined above.

Responsibilities regarding tax obligations

Another angle requiring LSPs to have a good understanding of the goods they facilitate is customs duties and taxes related to the importation or exportation of goods. When LSPs act as indirect representatives for their customers in customs matters, they may indeed be held liable for certain tax issues, including customs duties and taxes related to the importation or exportation of goods. An indirect representative in customs matters acts on behalf of another party but does so in their own name. This means that while they are performing actions or making declarations for their client, they are legally considered the party to the customs proceedings. The key risk for LSPs acting as indirect representatives is that any non-compliance by their clients, such as providing incorrect or incomplete information about the goods being shipped, can lead to the LSP being held responsible for resultant penalties or additional taxes. Due to these risks, LSPs need to implement rigorous checks when accepting appointments as indirect representatives.

Additionally, due to their global operations, many LSPs have an international structure: they often manage procedures across various jurisdictions through the local entities of the group structure, which highlights the importance of transfer pricing. The primary goal of these regulations is to ensure that such transactions are conducted at arm's length, meaning they are priced as if the entities were independent market participants. Traditionally, transfer pricing has been associated with tax strategies aimed at shifting profits to lower-tax jurisdictions. This practice, while aggressive, can sometimes fall within the bounds of the law (tax avoidance) and other times breach it (tax evasion). When transfer pricing is solely used for tax purposes, it can be difficult to justify the transaction, raising suspicions of money laundering. Moreover, in many jurisdictions, tax evasion, is often a predicate crime for money laundering. Therefore, for LSPs providing intra-group services internationally, it is essential to establish robust transfer pricing policies that are both transparent and defensible in every jurisdiction where they operate.

Forward Thinking

Given their critical positioning at the crossroads of global trade flows, LSPs are not merely facilitators of goods and services but are considered important parties of legal and ethical trade practices. Therefore, they must understand their clients’ activities, products, end-users, and end-destinations, while designing and applying internal management and robust compliance measures to prevent violations.

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